Latest survey: will house prices bottom out by year-end? The Reserve Bank may introduce DTI restrictions, a ‘powerful weapon’ for the housing market, next year…

The property boom in 2020 and 2021 drove house prices to record highs, but prices have since plunged across almost the entire country. They have now been falling for more than a year. As the Reserve Bank of New Zealand raises the OCR further, the market is still watching and waiting: when will the downturn end? When will the property market reach its bottom?

 

Survey: most believe the bottom will come in the middle of next year

 

A new survey shows that many people believe the downturn will continue into next year.

 

The latest House Price Index from the Real Estate Institute of New Zealand (REINZ) shows that the national median house price fell 13.3%, from NZ$880,000 a year earlier to NZ$762,500 in January this year. It was down 16.2% from the market peak in November 2021. Meanwhile, in January this year, Auckland’s median house price fell below NZ$1,000,000 for the first time in two years, and now stands at NZ$940,000.

 

Commentators agree that house prices will fall further over the coming months before the market stabilises, but for many, the question is how long the decline will last.

 

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A recent Stuff NowNext survey found that among respondents willing to offer a prediction, as many as 91% believed the market would bottom out by mid-2024. Meanwhile, 34% said they did not know. Among those who had a view, 62% believed the market would reach its low point at the end of this year, while 29% believed prices would continue falling into next year.

 

This is not just the public’s view; some analysts and economists share similar opinions.

 

Economists: perhaps at the end of this year or next year

 

CoreLogic chief property economist Kelvin Davidson said he tended to agree that house prices would largely have bottomed out by year-end. He said the Reserve Bank forecast further price falls next year, although these would be smaller, with the bottom coming in the final quarter of this year.

 

“By December, the downturn will have lasted about two years. That is quite a long, deep downturn, with prices falling about 20%. Property will not be undervalued, and affordability will remain stretched. But prices that have fallen 20% will appeal to first-home buyers, and may improve the figures for some investors, because that really does make quite a substantial difference to yields.”

 

He said interest rates might also have peaked, giving buyers greater confidence, while rising net migration would increase market demand.

Kelvin Davidson. Image credit: CoreLogic NZ

 

BNZ chief economist Mike Jones said it was difficult to pinpoint the market’s turning point, but his working assumption was that house prices could bottom out around the middle of this year.

 

He believed one prerequisite for a turning point was an end to interest rate rises, as higher rates had clearly influenced the market correction. “Signals from the Reserve Bank and overseas suggest interest rates may not reach a higher peak, but could remain at elevated levels for longer than previously expected.”

 

“So when the market does turn, that does not mean a strong recovery will automatically follow.”

 

He said the Reserve Bank’s tightening cycle was expected to peak around mid-year, and the market bottom could follow. Recent housing data supported that view.

 

“Prices are clearly still falling, but the pace slowed slightly last month, and sales volumes picked up a little in January. That is the first thing you would want to see as the market warms up. If it continues, you would expect price increases to follow. But forecasts are currently more uncertain than usual.”

 

Jones said that although house prices had fallen substantially, they were still about 15% above pre-pandemic levels, and affordability remained stretched.

 

Last week, Westpac acting chief economist Michael Gordon said he expected house prices to fall about another 7% over the remainder of this year before the market bottomed out.

 

However, even if house prices bottom out, that does not necessarily mean another boom will begin, because a major uncertainty remains: will the Reserve Bank introduce debt-to-income restrictions, a ‘powerful weapon’ for the housing market?

 

 

Could the Reserve Bank formally introduce debt-to-income (DTI) restrictions next year?

 

The debt-to-income ratio (DTI) is an important tool for assessing a borrower’s repayment capacity. As a way of limiting total borrowing, DTI uses the borrower’s income to determine the maximum amount they can borrow. BNZ briefly applied it, but withdrew it soon afterwards.

 

The Reserve Bank previously said it was unlikely to introduce debt-to-income controls on mortgage lending before March 2024. Mortgage advisers regard DTI restrictions as a relatively common lending policy internationally. Although they have yet to be formally introduced here, they are like a ‘sword of Damocles’ hanging over the New Zealand market, which will fall one day.

 

Kelvin Davidson said: “House prices and interest rates will still be high, and the Reserve Bank will introduce debt-to-income restrictions next year. This is a major change that will limit how many properties a person can own.” He said the market could remain relatively flat for a time before prices began rising again, as happened after the global financial crisis.

 

For the Reserve Bank, everything is moving in the right direction. House prices are falling, and the debt-to-income ratios taken on by new borrowers have dropped sharply compared with recent years.

 

The downward trend is clear in the Reserve Bank’s latest debt-to-income (DTI) data. DTI ratios among owner-occupiers nationwide are currently relatively low. The monthly share of new mortgage commitments with a DTI above 5—where borrowing exceeds 5 times the borrower’s annual income—has now fallen for 13 consecutive months.

 

 

Will this trend continue? Will the Reserve Bank actually introduce DTI restrictions in 2024? We will keep watching.